Pfizer (PFE -0.24%) and Merck (MRK -0.36%) have been giants in the pharmaceutical industry for years. Both companies have developed products that changed how diseases are treated and prevented.
These two drugmakers are also favorites for income investors. But which is the better dividend stock right now? Here's how Pfizer and Merck stack up against each other.
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Two key comparisons
The first metric that most investors look at when comparing dividend stocks is the dividend yield. Pfizer gets the nod with a dividend yield of 3.05%, a little higher than Merck's yield of 2.95%.
However, Merck's dividend yield has been higher than Pfizer's throughout much of 2022. The drugmaker's impressive stock performance, though, caused its dividend yield to fall slightly below Pfizer's yield in recent weeks.
Meanwhile, Pfizer stock hasn't fared as well. This relative underperformance is primarily due to uncertainty about the future demand for the company's COVID-19 vaccine.
It's not such a close contest on another key metric, though. Pfizer's dividend payout ratio of 35.4% is much lower than Merck's payout ratio of 48.9%.
Strong sales of COVID-19 vaccine Comirnaty have significantly boosted Pfizer's earnings, resulting in its especially attractive payout ratio. While Pfizer has a clear advantage, both companies appear to be in a solid position to continue funding their dividends at least at current levels.
Evaluating their track records
Companies that have great track records of dividend payments and increases tend to want to keep their streaks going. Both Pfizer and Merck fall into this category.
Pfizer has paid a dividend for 334 consecutive quarters. The company has increased its dividend payout in each of the past 12 years. Management seems to remain committed to growing the dividend in the future.
Merck has increased its dividend for 11 consecutive years. Chief Financial Officer Caroline Litchfield said on the company's Q1 conference call, "We remain committed to the dividend with the goal of increasing it over time."
The two big drugmakers appear to be fairly equally matched when it comes to dividend track records.
Looking beyond the dividends
Investors shouldn't limit their evaluation to only the dividend programs for Pfizer and Merck. How do they compare looking beyond the dividends to growth prospects and valuation?
Pfizer is poised to generate the most revenue for a pharmaceutical company in history this year. Although sales for Comirnaty will decline somewhat, Pfizer has other growth drivers, notably including COVID-19 pill Paxlovid.
The company's growth prospects are murkier after 2022, though, with uncertainties about future demand for COVID-19 vaccines and therapies. Still, Pfizer expects to increase its revenue by a compound annual growth rate of at least 6% through 2025 excluding its COVID-19 programs altogether. It looks to continue growing throughout the rest of the decade despite losing exclusivity for several key drugs.
Wall Street projects solid, albeit not spectacular, growth for Merck over the next five years. The company's cancer immunotherapy, Keytruda; human papillomavirus vaccine, Gardasil; and COVID-19 pill, Lagevrio, should rake in billions of dollars in sales.
However, Lagevrio's future is as uncertain as Pfizer's COVID-19 programs. Merck also loses U.S. exclusivity for both Keytruda and Gardasil in 2028.
As for valuation, Pfizer is the clear winner. The stock trades at only 7.4 times expected earnings. Merck's shares trade at a forward earnings multiple of nearly 12.6.
Better dividend stock?
It's pretty much a toss-up between Pfizer and Merck based only on their dividends. However, Pfizer appears to have better growth prospects than Merck does through the end of the decade. Pfizer is also more attractively valued than Merck is.
My view is that income-seeking investors should like either of these pharma stocks. But I think Pfizer gets the nod as the better dividend stock with all things considered.
